Vinson Kurian

Thiruvananthapuram, July 4

, AN expert panel that studied the banking and financial policy has said that there is not enough evidence to support an automatic association between bank size and profitability.

Gains from consolidation could be expected along greater economies of scale and from scope available to bigger banks, but this does not obfuscate the larger reality, the interim report commissioned by the All India Bank Officers' Confederation (AIBOC) has said.

The argument that the threat to domestic banking should be met squarely through consolidation, which would also serve to strengthen these banks and make them global players, is without logical or empirical basis. On the other hand, bigger banks tend to rely much more on arm's length transactions and standardised balance sheets and loan accounts, on fee-based income that seeks to avert credit and interest risk and on trading risks at the securities market.

These tendencies give rise to the phenomenon of financial exclusion (whereby a large segment of the population remains unbanked).

It also engenders financial fragility via greater exposure to financial markets.

Once the domestic financial sector is liberalised and then linked to external capital flows through capital account convertibility, the probability of banking crisis, currency and financial crisis increases manifold.

Dealing with these problems requires not merely restraining and even reversing the change in banking policy regime, but a restoration of an important role for an `accountable' central bank as a regulatory authority.

To restrict and reduce the fragility of the financial system, it is necessary to (i) rebuild Chinese walls between banks and the stock market and drop proposals such as permitting banks to trade in commodities exchanges and (ii) strongly regulate access to global resources, which would also help improve monetary management.

The expert panel comprised eminent persons such as Mr S.P. Shukla, Prof Amiya Bagchi, Prof Prabhat Patnaik, Prof C. P. Chandrasekhar, Dr N. K. Thingalaya and Dr N. A. Majumdar.

(This article was published in the Business Line print edition dated July 5, 2005)
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